Israel's interior minister has given final approval for the construction of 1,600 new settler homes in occupied East Jerusalem, his spokesman said.

Eli Yishai will also approve 2,700 more homes shortly, Roei Lachmanovich, the spokesman, told the AFP news agency on Thursday.

Palestinians have refused to take part in peace talks while the Israeli government continues to construct settlements in the occupied West Bank.

Lachmanovich said the construction of 1,600 units woud take place in the Ramat Shlomo neighbourhood in northern East Jerusalem.

"He has approved 1,600 homes in Ramat Shlomo and will approve 2,000 more in Givat Hamatos and 700 in Pisgat Zeev," Lachmanovich said, referring to two additional israeli neighbourhoods in East Jerusalem.

Lachmanovich said the final approvals were "economic" not political, linking the interior minister's decision to demonstrations over housing prices and the cost of living that have rocked Israel in recent weeks.

"These are being approved because of the economic crisis here in Israel, they are looking for a place to build in Jerusalem, and these will help," he said.

"This is nothing political, it's just economic."

The settlements are considered illegal under international law.

Israel has occupied the West Bank since 1967, and annexed East Jerusalem, a move not recognised by the international community.

The announcement of the new settler homes comes just weeks ahead of an expected move by the Palestinian Authority to have a Palestinian state recognised at the UN.

EU condemnation

The 1,600-house construction in Ramat Shlomo has already caused a diplomatic rift between Israel and the United States.

Yishai's ministry first announced the project in March 2010, as Joe Biden, the US vice-president, visited Israel and the Palestinian territories to lay the groundwork for new direct peace talks between the two sides.

The announcement drew sharp criticism from the US, leaving Binyamin Netanyahu, the Israeli prime minister, red-faced as he sat down for talks with Biden and prompting a mini-crisis between the allies.

Last week, the interior ministry issued a similar final green-light to the construction of 900 new homes in the East Jerusalem settlement neighbourhood of Har Homa, which lies in the southwest of the city, neighbouring Bethlehem.

Yishai, a member of the ultra-Orthodox Shas party, also linked that construction project to the protest movement, saying it would help address the "real estate crisis".

Israeli news site Ynet quoted him as saying he had directed his staff to promote the construction of small housing units in the settlement neighbourhood "in an effort to enable all Israeli citizens to purchase an apartment".

The approval of that project was swiftly condemned by much of the international community, including the US and the European Union.

Catherine Ashton, the EU foreign policy chief, said she was "profoundly disappointed" by the Har Homa announcement and that its timing was particularly regrettable.

The EU is working with other members of the international peacemaking Quartet, which also includes the US, UN and Russia, to draft a new framework for peace talks between Israel and the Palestinians.